The Adjustable-Rate Mortgage Gamble Is Back

When Los Angeles resident Jung Lim went shopping for a bigger house for his expanding family, his lender offered him an adjustable-rate mortgage with an interest rate about a percentage point cheaper than a fixed loan. The professor of dentistry figures the money he’ll save makes up for the extra risk. “If I could have gotten a 30-year fixed at the interest rate I’m getting the ARM for, I would have felt a lot more comfortable,” says Lim, who’s trading up to a $1.12 million, four-bedroom house in the Sherman Oaks neighborhood. “But I’m hoping to refinance in five years or less. And we’ll be in the house for about 10 years, so we could also sell. Hopefully prices have bottomed so we won’t be under water then.”

At the height of the real estate boom, ARMs accounted for about a third of all mortgages issued. Home buyers gravitated to this type of loan on the presumption that the value of their properties would keep rising and the debt could be refinanced before their interest rates were adjusted upward. Some loans had interest-only periods or very low initial teaser rates that subsequently spiked.